Earnings Labs

RLX Technology Inc. (RLX)

Q3 2023 Earnings Call· Mon, Nov 13, 2023

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Transcript

Operator

Operator

Hello, ladies and gentlemen, thank you for standing by for RLX Technology Inc Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements remarks there will a question-and-answer session. Today's conference call is being recorded and is expected to last about 40 minutes. I will now turn the call over to your host, Mr. Sam Tsang, Head of Capital Markets for the company. Please go ahead, Sam.

Sam Tsang

Management

Thank you very much. Hello, everyone, and welcome to RLX Technologies' third quarter 2023 earnings conference call. The company's financial and operational results were released through PR Newswire services earlier today and have been made available online. You can also view the earnings press release by visiting the IR section of our website at ir.relxtech.com. Participants on today's call will include our CEO, Ms. Kate Wang, our CFO, Chao Lu; and myself. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements typically contain words such as may, will, expect, target, estimate, intend, believe, potential, continue or other similar expressions. Forward-looking statements involve inherent risks and uncertainties. The accuracy of these statements maybe impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, many of which factors are beyond our control. The company is affiliated advisers and representatives do not undertake any obligations to update this forward-looking information except as required under the applicable law. Please note that RLX Technologies earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. RLX press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to Ms. Kate Wang. Please go ahead.

Kate Wang

Management

Thank you, Sam, and thanks everyone for making time to join our earnings conference call today. Before I get into our third quarter results, I would like to briefly update you on our industry's macro and regulatory involvement. As most of you know, it has been a year since the new regulation framework came into effect, bringing a number of tenders to the industry. On the supply side, the new rules have pushed the industry participants across the value chain to adjust with businesses and standardize their operations under the authorities supervision. This no longer concerns some strong players, including us, who have already adapted to the new regulations and proactively develop new compliant products to meet users' needs. However, persistent irregularities among other industry participants continue to disturb the market order and adversely set the industry's recovery with the negative impact of illegal labor products lingering. On the demand side, the new regulations seem to have less impact on users and consumption that have shown that most e-vapor users are still unaware of the changes brought about by the new regulations. A survey conducted by Shanghai Jiaotong University revealed that 40% of users now mainly use national standard of compliant products, but 17% have now even tried compliant products. Furthermore, only 40% of users said they knew that legitimate retailers are only allowed to sell tobacco fluid products. Users' lack of awareness of the new regulations has slowed the transition to compliant products as has the easy availability of legal flavored products, educating users about the new regulations, compliant product advantages, and the dangers of illicit products is pivotal to the industry's recovery, but this will take time and effort. Amid this challenging environment, we continue to refine and broaden our product portfolio, while improving operational efficiency during the…

Chao Lu

Management

Thank you, Kate, and hello, everyone. Before we start the detailed discussion of our financials please note, unless otherwise stated, all the financials we present today are in R&D terms. I will now provide an overview of our operational and financial results for the Q3 of 2023. Against the challenging backdrop Kate just described, our total revenue was down 59% year-over-year. However, this represents a significant narrowing from last quarter's 83% year-over-year decline. While the sales of our compliant products continue to be impacted by illegal products in the market, we noticed a quarter-over-quarter increase in device shipments, indicating that the demand for e-vapor products is still growing. On the other hand, cartridge shipments remain low as many users still use illegally compatible flavored cartridges in conjunction with our compliant devices. We want to remind our users that using illegal cartridges may damage our devices and void the warranty. Due to their poor quality, illegal cartridges often suffer severe leakage issues that can ruin devices and may cause other safety hazards. As a fully compliant participant in the e-vapor industry, we are dedicated to promoting the industry's recovery and long-term healthy growth. To that end, we continue to encourage users to call 12313 if they find anyone selling their new products. We are also conducting user education campaigns to increase awareness of the regulations and the dangers of illegal products. We hope these efforts will effectively reduce the sale and use of the illegal products, while better protecting every user. Turning now to profitability. In the third quarter, our gross profit margin remained stable at around 25% due to the unfavorable change in our revenue mix. However, on a like for like basis, our gross margin, gross profit margin, while our core e-vapor business to provincial distributors continued to improve…

Operator

Operator

[Operator Instructions] The first question today comes from Lydia Ling with Citi. Please go ahead.

Lydia Ling

Analyst

My first question is regarding your overseas development as just mentioned, you had terminated noncompetition agreement with RLX team. So what's the rationale that you consider to extent like, export overseas expansion at this point and how it works with the existing overseas business by your parent company? And do you have any detailed plan or target for overseas business that you could share to us? And also, how do you about the potential upside to a company? So this is my first question. And the same question is, happy to see the cash dividend declaration, so how do you consider the payout ratio and what's the dividend policy looking forward?

Kate Wang

Management

Thank you very much Lydia. So the first question is on the international expansion and the second one is on the dividends. So RLX operator e-vapor business only in China due to regulatory uncertainties and a relatively low social acceptance in the overseas market, when it was its IPO. But in the last two to three years, we have witnessed positive developments globally that's changed our decision. First, many countries have established an encouraging and stable regulatory framework for this category, becoming attractive and stable markets for leading and compliance brand to enter and develop a presence. Second, global adult smokers are increasingly perceiving e-vapor products as a mainstream, effective harm reduction nicotine alternative, evidenced by growing user penetration in many regions. These two external developments have been highly encouraging. For RLX itself, our franchise has become a household name with clear national market leadership. Internally, we have upgraded our organizational capabilities with adequate capabilities and resources to expand our franchise to areas outside China. To achieve our mission, we decided to terminate our non-competition agreements with RLX Incorporation, which enable us to seize growth opportunities in the international markets in and establish a significant global presence outside China. We will share more details on our international expansion in the coming quarter. Regarding your second question is on our dividend policy. As indicated in our earnings release, our Board approved our first cash dividends of US$0.01 per ordinary share or per ADS to reward our valued shareholders' continuous support. Despite macro volatility and uncertainties, we are highly confident in our franchise future, building on our international expansion, steady profit generation, robust operating cash flows and adequate capital reserve. The cash dividend and our announced share buyback program demonstrated our confidence in our prospects and commitments to returning shareholders despite the short-term volatility in the stock markets. We plan to maintain a consistent and sustainable dividend payout policy that may grow progressively with our earnings.

Operator

Operator

The next question comes from Charlie Chen with China Renaissance. Please go ahead.

Charlie Chen

Analyst · China Renaissance. Please go ahead.

Thank you, management, for taking my questions. I have two questions here. The first one is about the industries. I can see the company actually grow revenue by roughly like 10% or so quarter-on-quarter. So I think in the past a few quarters, China's e-cigarette industry experienced, kind of the regulators crackdown, resurrection of the legal product. So I just wanted to have some color. What do you think will be the normalized industry growth going forward? Or is that too early to say or you have, kind of a setup pattern of the future growth of this industry? So that's your first question. And my second question is, with autos cost saving effort, we can see your company's non-GAAP EBIT margin loss has narrowed quarter-on-quarter. So originally, in the past, we recall that management guided or aimed to have breaking even non-GAAP EBIT margin in the fourth quarter. So do you still think the target is achievable based on current circumstances?

Kate Wang

Management

So the first question is on the growth of our industry and the second one is on the profitability of our company. I think the user demand for National Standard products has improved overall compared to what you mentioned in March 2023, before the regulators initiated a special crackdown on illegal products. However, after the special action ended, our industry faced waves of challenges from illegal products as their illegal sales have become more secretive. At the beginning of this year, retailers would publicly display illegal products on shelves. Now, after the special action, they only sell these products to users they are familiar with. Therefore, it's difficult to accurately estimate the demand for this category and predict the need for the national standard products. We are confident in our regulated enforcement and believe more users will gradually use National Standard products in the medium and long-term. So regarding your second question, I think as discussed in our second quarter earnings conference call, we have significantly optimized our cost structure and streamlined our operations over the past few quarters. As a result, the absolute amount of our gross profit improved by 7% quarter-over-quarter and our non-GAAP operating expenses for the third quarter decreased by 27% quarter-over-quarter and 3% year-over-year. With our top-line recovery and cost reduction efforts, we realized positive non-GAAP operating profit in September. We expect our non-GAAP operating profit to remain positive in the fourth quarter if our top-line and cost structure don't change significantly in this or next month. Furthermore, our operating cash flow has been positive for 2 consecutive quarters. In the third quarter of 2023, we achieved and operating cash inflow of RMB67 million, compared to a RMB41 million inflow in the third quarter and RMB231 million cash outflow in the Q1, demonstrating our ability to adapt to the changes in macro and industry development quickly.

Operator

Operator

The next question comes from Peihang Lyu with CICC. Please go ahead.

Peihang Lyu

Analyst · CICC. Please go ahead.

This is Peihang at CICC. I have 2 questions here. The first one is about the product. Could you give us some color on the sales of the recent approved GV products in the third quarter? And how is the sales proportion for each major product? And my second question is about the channel. After the renewal of retail license, and what is the most updated number of domestic outlets, and how is their profitability and their operating situation from your perspective?

Kate Wang

Management

So the first question is on new products and the second question is on the retail order sets we have. So for the first question, our user survey actually shows that 2 flavors that we launched a couple of months ago [Indiscernible] are becoming increasingly popular among users. These flavors are now available at most stores nationwide. And in October, the sales contribution of these 2 flavors to our Phantom series has already reached the mid-teens. Additionally [Indiscernible] Net Promoter Score now ranks number 3 among our Phantom series, just slightly behind our best-selling [Indiscernible] flavors. We anticipate that the sales contribution of Shenzhen Wuxin and [Indiscernible] will continue to rise. And in October, we also launched our 5th cartridge series, LEILI, which is compatible with ASUS device, but are more affordable than its cartridges. By the end of October we have launched the LEILI series in more than 17 provinces. And regarding your second question, it's about the number of retail outlets. The number of retail outlets has remained stable in the past few months, following regulators' special crackdown on illegal products. Furthermore, more users have begun trying compliance products. As we explained in our opening remarks, only 40% of participants were aware that after October last year, retailers could only sell tobacco flavored cartridges legally. As more and more users gradually become aware of the new regulations and the benefits of national standards, such as required approvals before product launches and the assurance that all ingredients in the liquids are on the right list. They will be increasingly interested in using national center products. This will improve our retailers' productivity and enhance their profitability. Our self operated stores' profitability could reflect the overall sales profitability. These stores' profitability has been increasing quarter-over-quarter, and they have started to turn profits on the operational level in the past couple of months. Thank you for your questions.

Operator

Operator

Due to time constraints. Now, I would like to turn the call back over to the company for closing remarks.

Sam Tsang

Management

Thank you once again for joining us today. If you have further questions, please feel free to contact RLX Technology's Investor Relations team through the contact information provided on our website or TPG Investor Relations. Thank you.

Operator

Operator

This concludes the conference call. You may now disconnect your lines. Thank you.